Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

inventory's the name of the game

|Includes: Charles & Colvard Ltd (CTHR)

As my father repeated to me over the years, all those precious, semi-precious, and otherwise shiny stones that adorn jewelry are little else than fancy colored glass. In this way, CTHR is just another purveyor of cut glass, most of it mounted on expensive metal.

After sales tanked, new management is in the business of adding distribution channels. Loose stones sold to major distributors are one approach to meet this goal. This supplements the current model of designing and selling finished products, which is much more difficult. Let's face it, the new business model takes a lot of the guesswork and skill out of making jewelry. We're not even talking about predicting fashion trends here. Yes, stones go out of style, but not as fast as most other fashion accessories. Certainly selling stones should be easier than selling finished jewelry.

Based on the company's reported estimate of its assets, almost all of the inventory consists of cut stone (classified as non-current inventory) and is worth $40 million at the lower of acquisition or resale value. Interestingly, this only values the highest quality or VG inventory that the company carries. The rest is valued at zero, nada! Who knows how much other cut glass the company has stashed away? By this measure, inventory alone exceeds the company's market cap of $22.7 million. The company has $6.8 million in cash on hand, bringing its enterprise value down accordingly, for a value of $15.9 million.

It's true that if a going out of business sale were to occur today, the inventory might not fetch the estimated value. Then again, it doesn't look like the companyplanning a going out of business sale today, so the inventory might sell for more than its carrying value. Also, as volume picks up, if a major distributor should jump in, the inventory will probably rise in value.

Disclosure: Long CTHR